“Do more of what works and less of what doesn’t.” -Steve Clark
Here is hope your weekend was safe, healthy and enjoyable.
As we harness the strength to make it the last miles of this 4-year marathon of political jousting, it is vital we focus on what is happening while all the vitriol has been spilled. The market is giving you clues – most of which (not all – but it is never all) are defining a future that is far more positive than most are either desirous of accepting – or bold enough to embrace.
I recognize that appears to be a pretty rosy outlook. It is helpful to focus on that because I have not (yet) met a successful investor, meeting their wealth goals over time, who has done so by being negative on the future long-term prospects of the United States of America.
I have a suggestion for every person reading (I did this a long time ago): Stop using whatever “social media” you have decided is vitally important. I say it for two reasons.
First – I am pretty certain your stress levels will fall, and
Second – it may very well hit home that social media has become a drug, leading some to believe things that technically do not exist.
Another idea – take 90 minutes this weekend and watch the Netflix piece “The Social Dilemma.” Like it or not, agree with it or not, believe it or not – all the same, it will change your perspective of what is unfolding around us. I have watched it twice now – and I am struck by the ending more than all of the other pretty frightening stuff in the first 80 minutes.
As the documentary ends, I was struck most by the idea that the engineers and internal bigwigs at most of the social media platforms “aggressively limit” the time they permit any of their family members to use the very platforms which made them rich. We can learn a lesson somewhere in there I suspect.
Maybe it is not so much giving up the complete use of the tools – but instead remembering that they are just that -tools. One could readily argue they are not real-life – and should never be consumed as such. Like I tell Max – emoji’s are fun to send back and forth but they do not make a relationship. That still takes people and direct contact – not social media.
Ok – enough blathering on.
Things are getting better. We are all trying to tip-toe through the current stage of the media monster world. That stage where darn near any suggestion of positive news is not only bad, but is met immediately with a suggestion that it likely means one does not care for elderly being affected by the virus season.
Long-time readers cannot imagine how many times I rewrite sentences today out of concern that someone, somehow, might take offense when none is ever intended or even thought of during the morning notes writing sessions. Sessions which have all been extended due to these wasted energy, political vitriol concerns.
So – let’s focus on the good.
Earnings season starts this week. Good Lord, I swear the last one just ended. LOL. This one is going to give us a stronger sense of the widespread business model shifts we are likely to see accelerate into 2021 and beyond. We will never go back to the old normal way of doing things. New normals are all we should be looking to embrace…even when it feels a little scary.
Expect beats to be even more significant than last quarter as change speeds up margin improvements in every crack and crevice:
The forward 4-quarter estimate for the S&P 500 returned to its familiar pattern of sequentially moving higher this week, printing $156.08 vs. $155.98 last week (recall this is set to bump about $10 as we roll the last 4th quarter into the 2021 forward look).
What remains the strong point is that since July 1, only two weeks of the last 16 have seen sequential declines in the forward estimate.
This weekly overview on the S&P 500 numbers – both expected EPS and revenue growth – shows that the positive trends remain in place, but analysts are still very nervous about raising numbers in advance of seeing prints. (It took them a decade to “catch-up” with the recovery momentum from the GFC in 2009 – and they were still underestimating.)
This week is a flood of banks, brokers and money managers for the kick-off. The two busiest weeks for this season will bracket election week.
Even More Detail?
- With the forward estimates improving sequentially to $156.08 from last week’s $155.98, the forward PE is 22x (but see last bullet point).
- TheS&P 500 forward earnings yield fell a little bit this week to 4.49% from 4.64% last week.
- The “average” expected calendar 2020 and 2021S&P 500 EPS growth fell to 3.5% this week, from a long string of 4% prints. This is the normal “hook” pattern before a season begins as analysts get nervous – let’s see what it looks like after a few weeks of beats to the upside.
- As noted above the “expected” 2021 EPS of $166.22 (once we get the Q4 rollover) is still above the 2019 actual EPS of $162.93. This number puts current values at a little under a 21 P/E – against the 10-year Bond P/E of 129.
Cash is Still The TOP Fear Trade
Even as sentiment stabilizes a bit in the last week, sure to go deep into fear again on any red ink for a few days, cash is still in high demand – and the levels “in the bank” keep rising. Kind of odd don’t you think – for a world that the press wants us to believe is on the brink of Armageddon.
This first chart below tells you how well money markets are working.
Think of it as a way of seeing whether the Fed is behaving correctly as Calafia puts it into perspective. The blue line is the inflation-adjusted Fed funds rate (i.e., the Fed’s target rate minus the year over year change in the Core Personal Consumption Deflator), and the red line is the real yield on 5-yr TIPS, which in turn is essentially the market’s expectation of what the real funds rate will average over the next 5 years.
When the blue line is below the red line, the Fed is behaving well and the economy is healthy, because the market is expecting the real funds rate to rise in the future. But when the blue line is above the red line this means the Fed is so “tight” that the economy is likely to weaken and the Fed will eventually need to lower the real funds rate in response.
Today it looks like the Fed is just about right.
These next few charts are going to show you what panic looks like outside of sentiment surveys. Like I have always said when you look for important foundations – watch what people do with their money – not how they answer surveys.
To be blunt – the demand for cold hard cash has never been higher – and yet another record is set in the latest Fed data – cash on hand in various types of deposits?
A cool $18.7 Trillion(nearly $11 Trillion in savings deposits alone):
The next chart below can be seen “as being a proxy for the amount of cash and cash equivalents the public wants to hold, expressed as a percentage of average annual income.”
Prior to the Covid crisis, as a country we were comfortable holding a cash and cash-equivalent reserve equal to about 70% of our annual income; now it’s almost 90%.
Money demand was relativelystable for many decades, but it has increased dramatically in the wake of the Great Recession and now during the Covid panic.
Think of this as a scale – fear hoards cash. It is hopeful to think we will very likely see this cash demand fall a good bit in the months and years to come as:
a) confidence returns,
b) the phoenix once again rises from the ashes and
c) the economy does what it does – expands.
I won’t go into it too deeply – but suffice it to say that the media’s last stand is the next 220-21 days. Good Lord is it set to be nasty. Our job?
1) Wait patiently
2) Overlook the fog ahead and focus on the higher values building
The economy is coiling. Just as one would think it is ready to collapse, it continues to surprise…to the upside. My almost 4 decades have taught me a few things: one is the tougher and uglier the setback, the bigger and more robust the “always surprising” recovery.
One need not buy into those words. One need only to think back in history to the terrible times and horrible events of the past – then unimaginable – just as we are feeling today.
ALL of those previous periods have one major thing in common:
They took place at much lower price levels in the markets.
So – when the Grim Reaper knocks on the door of your mind and stokes your fears — laugh at him and look forward – not back.
This rocket-ship ride is just getting loaded up for the trip.
Long-term investors have learned that when all of the above ingredients are baked into the pie, the road ahead has been marked by a clear and resounding message:
…surprises to the upside.
It is our job to withstand the assured storms ahead and be disciplined in our planning for clients’ goals.
Sure, more choppy waters are likely as the earnings season unfolds ahead. Oh – and we have that election thing too.
The media will do their best to knock you off your focus, grabbing at your fears and taking you off your pathway.
Rise above that tension and pull your seatbelt tighter. Exciting things are dead ahead.